CattleFax: Record Prices & Volatility Ahead

Price prospects for U.S. beef producers look extremely positive, particularly for the cow-calf segment, CattleFax analysts said during their annual CattleFax Outlook Forum in Denver earlier this month. But tempering that optimism is concern about the extreme volatility that exists in today’s market, they add.

Price prospects for U.S. beef producers look extremely positive, particularly for the cow-calf segment, CattleFax analysts said during their annual CattleFax Outlook Forum in Denver earlier this month. But tempering that optimism is concern about the extreme volatility that exists in today’s market, they add.

“It’s the most volatile time I’ve seen in the 30+ years that I’ve been looking at these markets,” says CattleFax CEO Randy Blach. “I think we all need to figure out where that risk tolerance is in each of our businesses. We have to focus on that margin.”

The good news is that record-high prices are forecast for all classes of cattle in 2011 with continued increases expected in 2012, CattleFax says. Fed cattle values are expected to average near $103/cwt. in 2011, with higher prices again in 2012.

Meanwhile, feeder cattle values are projected to average near $118/cwt. ($75/head more than in 2010), and calf values near $138/cwt., or more than $93/head more than in 2010.

“Profitability is expected to be positive for the cow-calf segment; however, producers are encouraged to evaluate retaining ownership through the feeder cattle phase in order to possibly increase profits,” CattleFax says.

Meanwhile, bred-female values are forecast to average from $150-$200/head higher in 2011, near $1,200/head. And, cull cow values are forecasted to average near $65/cwt.

[4]

“If the U.S. dollar remains low, imports of lean meat will remain inhibited and support domestic prices. Demand for lesser-priced beef items, such as cow meat, is expected to remain high as the domestic economy continues the recovery process. Selling cull cows prior to the fall run or retaining ownership into the early spring of 2012 is expected to once again reward producers on price and profitability,” CattleFax points out.

“As we think of these record-high prices, it doesn’t necessarily mean record-high profits,” Blach cautions. “The cost of production for this industry is nearly $250/head more today than it was back earlier in the decade.” That’s largely thanks to the increased cost of feed, he says.

[5]

“In this environment, it will be very easy to be wrong,” Blach says. “These markets can move with a lot of power in a very, very short period of time. It’s not a matter of getting all of it; it’s a matter of having a plan, a specific objective and saying, ‘Hey, when I can meet these profit objectives, I’m going to take it, put it in the bank and go on down the road.’”

CattleFax reports that total cattle numbers are down 1.4% in 2011, with another 1-1½% decline expected in 2012. Meanwhile, fed steer and heifer slaughter levels are expected to decline 2% in 2011, and cow slaughter 8% in 2011. Those reduced slaughter levels are expected to result in a 373-million-lb. (-1.4%) reduction in beef production despite a moderate increase in average carcass weights.

[6]

“We have smaller (beef) supplies globally and domestically, and we have populations that are growing rapidly – 700 million more people in the world in the next decade and 27 million more in the U.S. Smaller supplies, growing populations and growing incomes equal opportunity,” Blach says.

“The demand side is improving. We’re going to take a conservative view, but we are going to continue to see GDP growth in the U.S., albeit we may have high unemployment for yet another couple of years, but we do think we have the train back on the track to the point where we’ll see some additional growth.

“I think we’ve all understood that we’ve had a very favorable situation the last couple of years, if we could just get the demand piece to come into focus for us. And that is happening from both an export standpoint and domestic demand.”

[7]

Reduced beef production and increased exports are expected to drive 2011 per capita net beef supplies lower for the fifth consecutive year, CattleFax reports. Meanwhile, forecasts call for domestic beef demand to be steady to slightly better during the next two years, with retail beef prices forecast to average $4.20/lb. in 2011, for an increase of 20¢/lb. Wholesale beef values (the composite beef cutout) are forecast to increase $10/cwt., to average $164/cwt. in 2011.

Beef exports are expected to increase 8% in 2011 and continue to rise in 2012. Fed cattle imports from Canada are likely to be steady to 2% larger in 2011, while imports of feeder cattle from Mexico and Canada are forecast to rise 2% above the 2010 level, totaling 1.4 million head.

The fly in the ointment is grain prices, where corn is expected to remain historically high as U.S. and world corn-stocks-to-use levels remain historically tight. Spot corn futures are forecast to average near $5.25/bu. in 2011. Meanwhile, hay prices are projected to average $114/ton for all hay (dry) in 2011, and $120/ton for alfalfa (dry) hay compared to the previous averages of $109 and $114/ton, respectively.

“Have you continued to cultivate your relationship with your lender or lenders? They are a key partner in this and you really have to grasp that concept as you move down the road. Think about this volatility just for managing risk,” Blach says. Still, he adds, “It’s going to be a good time, and it’s going to offer some great opportunities, but there will be a lot of volatility.”